Mt. Gox Founder Faces Fraud Lawsuit Over Hack Vulnerabilities

Jed McCaleb, founder of early crypto exchange Mt. Gox, is currently being sued over his handling of the exchange during his time as its CEO.

According to the complaint, two former traders on Mt. Gox have accused McCaleb of fraudulent handling of the exchange, with McCaleb allegedly leaving major security holes that led to future hack attempts. The Mt. Gox hack in 2014, when Mark Karpelès was CEO, is the most famous of the attacks on the early crypto exchange, with some 850,000 bitcoin being stolen and the site getting shut down.

However, there were also lesser-known hacks on the site before McCaleb handed off control to Karpelès. In particular, a large volume of smaller hacks took place in 2011, leading to the loss of large amounts of user bitcoin. As the suit alleges, “rather than secure the exchange” after this first round of hacks, “McCaleb sold a large portion of his interest in the then sole proprietorship, and provided avenues to the purchasers to cover-up the security concerns.”

This suggests that McCaleb did his best to present Mt. Gox as a completely stable exchange until the problem was out of his hands, keeping users in the dark regarding the massive security flaws that later enabled the hack that shut down the site altogether. Crypto traders Joseph Jones and Peter Steinmetz are thus claiming that McCaleb is directly responsible for the loss of their funds, even while Karpelès was CEO.

After the collapse of Mt. Gox, Karpelès was indicted on charges related to mismanagement, and managed to escape charges of outright embezzlement while being found guilty of record tampering in March 2019. Although it became impossible to determine whether or not Karpelès had directly stolen some bitcoin of dubious origin from Mt. Gox users, the case’s presiding judge, Tomoyuki Nakayama, stated that the manipulation of data to this extent discredited the integrity of crypto exchanges altogether. The rehabilitation process for defrauded users began this year, with the case’s trustee automatically preparing claims for users who had verified Mt. Gox accounts at the time. Jones and Steinmetz are not filing a class action suit on behalf of all defrauded users, but nevertheless a guilty verdict for McCaleb could set a precedent for the future development of the rehabilitation process.